Updated from 12:03 p.m. EDTFinancial stocks finished mostly higher Wednesday after a boutique firm raised its rating on the banking industry, arguing nonperforming assets will peak at the end of this year. Bank of America ( BAC) and Citigroup ( C) rallied after Fox-Pitt Kelton Cochran Caronia Waller upped its rating on the banking industry to market weight from underweight, the first time the firm has raised its rating on U.S. banks since 2004. Bank of America made headlines of its own. The bank's annual shareholder meeting was contentious as some of BofA's biggest shareholders have been calling for Chairman and CEO Ken Lewis to resign for his part in the acquisition of Merrill Lynch and the plummet in share price.
Aside from the Fox-Pitt Kelton upgrade, Citigroup was in the news after reports surfaced that it is asking the Treasury Department for permission to pay special bonuses to many key employees, according to a report in The Wall Street Journal. The news comes one day after word that the government's stress tests of banks would show capital levels to be insufficient to weather the economic storm. A separate report in The Financial Times Wednesday says Citigroup has told U.S. regulators it could fill the capital shortfall by selling large businesses, asking more investors to convert their preferred shares into common stock and reducing its balance sheet. Citigroup added 8% to $3.12. Among other U.S. banks, Wells Fargo ( WFC) finished higher by 2.5% and JPMorgan Chase ( JPM) climbed 5.2%. Speaking of the need for capital, Bloomberg reported Wednesday that at least 6 of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests. The report cited people briefed on the matter. The report said that some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, according to sources. The Fed is now hearing appeals from banks -- including Citigroup -- that regulators have determined need more of a cushion against losses, according to the report. Elsewhere, E*Trade Financial ( ETFC) reported quarterly earnings after Tuesday's close, disappointing investors as the online brokerage acknowledged that it would need to raise more capital in conjunction with a first-quarter loss that widened when compared to the prior year. Shares dropped 33.7% to close at $1.63.